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Also available as podcast (Episode #121)
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Do I Have To Drop My Series 7 If I Go RIA?
A common misconception about the RIA model is that you must be 100% fee-only, and thus “drop your 7.” While there are many advisors that welcome the chance to drop their broker-dealer affiliation, many others still have, and prefer to maintain, a sizable amount of client assets in commission based solutions. There are multiple different ways to potentially accommodate either path. While some advisors chose to drop their 7, others are in scenarios where it can still be accommodated.
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Full Transcript:
Do I have to drop my Series 7 if I go RIA? That is today’s question on the Transition To RIA question & answer series. It is episode number #121.
Hi, I’m Brad Wales with Transition To RIA where I help you understand everything there is to know about why and how to transition your practice to the RIA model.
If you’re not already there, head to TransitionToRIA.com where you’ll find all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers. All kinds of things to help you better understand the RIA model.
Again, TransitionToRIA.com.
On today’s episode, I’m asked fairly frequently… “if I were to transition my practice into the RIA model, do I have to drop my series seven?”
A quick reminder for some of you that are maybe newer to the industry, unlike other industries like attorneys and doctors, there’s no defined definition of what a “financial advisor” is.
We’ve kind of commonly accepted it to mean certain things, but there’s no specific requirements. When I talk about financial advisor, I think we all know what I’m talking about, but just a little clarification. Most “financial advisors” nowadays at any of the big firms are wearing two hats.
They are wearing the hat of a registered representative. That means they have their Series 7 with a broker-dealer. It is the Series 7 license that enables them to become a registered rep with the broker-dealer. Which enables them to offer commission-based solutions for their clients.
The other hat they are often wearing is that of an IAR, an investment advisor representative. Usually of the broker-dealer’s affiliated so-called “corporate RIA.”
To become an IAR, it varies by state, but in most instances the way advisors get there is by taking the 65, maybe the 66, and there’s some instances where if you have a CFP somehow, if you had that before a 65, that usually is a qualifier as well. But it’s the 65/66 that enables you to offer fee-based advisory accounts to clients.
And again, most advisors nowadays wear both of those.
Back in the day, decades ago, most all advisors were just pure brokers. They solely had that Series 7 hat on. They were solely a registered representative of a broker-dealer. Everything was done on a commission transaction.
Over time, as the industry has evolved, those broker-dealers added a corporate RIA to their offering. That made it possible for their previously registered rep-only brokers to then also offer fee-based solutions as well.
So, the question is, if you were to go into the RIA model, are you forced to drop your 7? Forced to drop your affiliation with a broker-dealer?
Now, some of you are absolutely ecstatic about the thought of getting out of the broker-dealer world, out of the FINRA world.
It’s crazy how our industry operates where there’s one set of rules when you’re wearing the broker hat, and there’s another set of rules when you’re wearing the IAR, investment advisor representative, hat.
Many of you are eager to lose one of those hats. But for some of you, maybe because of the composition of your practice, you’re not ready, at least near term, to do that. And so the question is…. are you forced to drop your 7?
The short answer, and there are some nuances, which I’m going to get into, the short answer is no.
If you are at currently at a wirehouse, a regional firm, an independent broker-dealer, and you see all these folks going RIA, Brad’s doing all these episodes on it, you’re thinking it might be for me, but maybe I don’t want to drop my seven or I don’t think I can drop my seven, will I be forced to?
As I noted, the short answer is no.
However, there are many RIAs out there that are 100% fee-only. They have chosen to set up an RIA, or an advisor has joined one that has chosen to be 100% fee-only. In those scenarios, those advisors do not have their 7. They solely have their 65, or maybe 66, etc. They are fee-only.
However, there are quite a few, and I don’t have the breakdown of the stats, RIAs that are, and this is quite normal, that have both fee business and commission business.
It could be an advisor or team that is starting their own RIA, where they still have a sizable amount of, often thought of as, legacy commission assets. They’re meaningful to the client and they can’t just simply walk away from that.
There are ways to accommodate that. I’ve done several episodes on how to accommodate your commission assets. I just did a recent episode on how to manage your remaining commission assets while moving to the RIA model. I encourage you to check that episode out.
In its most simplest form, you set up your own RIA and put all of your fee accounts under that. You then work with a so-called RIA-friendly broker-dealer. There are only a couple of them in the space. But they say… “our business model is you go start that RIA, you do your fees over there, you keep 100% of that, you run your own P&L, blah, blah, blah. We know you have a need for your commission assets to be housed. We will be your broker dealer for that. Here’s the payout on that, and here’s how the arrangement works.”
Now one caveat, and this is like a lot of things that you must think through when potentially transitioning to the RIA model, those friendly broker-dealers have minimum production requirements. Because they are not taking an override on the advisory assets – they’re only making their money on your commission assets – so they typically have minimum production levels on the commission side.
Because it is only the commission side they are going to take a scrape off of, it’s just simple math, it needs to be worth their while.
My point though is, that option is out there. There are some caveats that you would have to understand with it to know if it might work for your practice.
Along the same theme, a lot of the advisors and teams I talk to aspire to become 100% fee-only. That is their end game. They think it ultimately will be better for their clients. It will be easier for them as advisors.
Some can go 100% fee-only as part of the transition, either because they’re already almost entirely fee-based now and it’s just whittling down that last few percentages of commission assets, or they’re willing to convert a lot of things as part of the transition.
For others, that’s a bridge too far to do as part of the transition. But they aspire to get there eventually.
So, the question is, how do you whittle that down?
I did an entire episode recently, so I’m not going to rehash it all here. Check that episode out. But just to give you a few brief examples.
A typical example of legacy commission assets that an advisor has, are legacy variable annuity positions. Maybe it was an annuity the client already had when the advisor first onboarded them as a client, or they used a commission-based variable annuity with the client in the past.
What I’ll often hear from an advisor, is while that might have been a good solution in the past, they don’t plan on doing any new commission variable annuity business. They might look at fee-based versions of variable annuities going forward, but they don’t plan on any new commission based variable annuity business.
However, they often have a large amount of existing positions which pay a meaningful trail. It doesn’t make sense to walk away from it. Let alone usually those same clients that have the variable annuity also have a fee-based account with you as well. There are techniques though to potentially convert some of those.
I also hear from advisors who have A-share or C-share mutual fund positions. Those can typically be put in a fee-based account and converted to institutional class shares.
There are ways to manage concentrated stock positions or cash management positions.
When I’m talking to advisors – and this is big part of what I ask, what is their commission situation – more often than not, there are solutions and pathways to essentially migrate that to the fee side. As I often say, solve for that.
As I walk advisors through this, many end up taking a path of 100% fee-only.
However, going 100% fee-only is not appealing to some advisors, they don’t desire to do that. They like the status quo. It simply might be a bridge too far.
And for some of you, commission production is a very meaningful revenue source. I’ve talked to advisors and teams that have variable annuity positions that are paying off hundreds of thousands of dollars a year in trails. That’s very meaningful.
It’s not just a simple thought process to change that or convert that. Which is not to say there aren’t potential ways to still generate revenue from some of the available solutions, but that’s much more easier said than done when talking large numbers.
The main takeaway is to know you can aspire to be 100% fee-only, but you are not forced to do it. You’re not forced to drop your 7 if you don’t want to.
Now, with that said, the RIA model is meant for advisors and teams whose practice are predominantly fee-based, whether near term or long term. Again, you don’t ever have to be 100% fee-only if you don’t aspire to, but being predominantly fee-based is what the model is best for.
I typically tell advisors their practice needs to be 70%+ or so fee-based currently to consider the RIA model.
If you’re, for instance, 50% fees, 50% commission, in theory, some of these solutions will still work. In theory, we could talk it out. In theory, you might even choose to follow that. But the reality is, for your practice, if you’re 50-50, that’s what the independent broker-dealer model is for.
If commission business is a big part of your practice, and you want to be independent, perhaps you’re in that 50-50 range, or certainly if you’re more commission than fees, the independent broker-dealer model is going to be your best bet.
But once you start getting that 60, 70%+ plus fee-based, then you should be looking at the RIA model.
I’ll leave you with two final thoughts.
First, think back to when you took the 7, as this topic was one of the items that was discussed. It used to be, up until just a few years ago, that if you left a broker-dealer, which would then “drop your 7” at that point, if you didn’t reaffiliate with another broker-dealer within two years, you would “lose your 7.”
Keep in mind though, the 7 is just an exam. It’s a qualifier.
But the idea being if you took your series 7, you passed it, you became a registered rep of a broker-dealer, at whatever point if you left that broker-dealer, that 7 stays active and you had a two-year window to reaffiliate as a registered rep with some other broker dealer. Which would then start the whole clock over again if you left that firm. That was a way to keep your 7 safe essentially.
Just a couple of years ago, FINRA, who governs all this, came out with a new policy. They recognized the two-year window was too short. An example they gave is if someone had to step away from the industry to handle a family situation, perhaps a health situation, and two years passes and now they must retake the test again. That’s an example I heard them put out there.
Now they have come up with a new program called the Maintaining Qualifications Program. The MQP.
Now, if you leave a broker-dealer, you now have five years to reaffiliate with another broker-dealer before potentially losing your 7.
Unlike the old version though where you could leave a broker-dealer, not do anything, and if you reaffiliated within 2 years, you were good. Under the MQP, there are a few additional steps involved.
First, you must pay an annual fee every year. Last time I checked, I think it was $100, so fairly nominal.
Second, you must continue doing your regulatory continuing education every year.
Point being, now if you leave a broker-dealer, and unless you utilize something like an RIA friendly broker-dealer, you now have a five-year window. Provided you do the continuing education, and pay the fee each year.
I tell advisors, if you’ve gone on your new path and you’ve gone five years without the need again for the 7, at that point you can feel rest assured you’re not going to need it going forward. Let it lapse and move on.
So just know it used to be two years, now it’s five years.
Then the final point I’ll make, relates to “losing” the 7.
It is a mental hurdle for many advisors. I get it. I had my 7 at one point. I took the test. I realize it’s not a fun test to take. It’s not a fun test to study for.
But many advisors are increasingly fee-based, or almost entirely fee-based. Yet many of them still can’t bring themselves to “give up their 7,” even though they’re functionally not even using it.
They might be at a wirehouse firm or an independent broker-dealer, and again, under those circumstances, wearing both hats. They could be 99% fee based or even 100% fee based, they’re not even using their 7. They’re not using the broker-dealer.
But some of those advisors can’t move on from it. The mental idea of “losing” their 7 that they worked so hard for 25 years ago is just too much for them.
I’ll talk to advisors that are at independent broker-dealers. They are already independent. They are already running their own business. They are already able and willing to take on all the local responsibilities of doing that. Their practice is literally 100% fee-based at that broker-dealer, so they don’t even need the broker-dealer side of things. They’re only under the RIA side of things.
I ask them, why are you not going into the RIA model? Your practice, by definition, is what the RIA model is for. The answer is they just can’t bring themselves to give up the 7.
And so they stay at that independent broker-dealer. They stay giving up a payout to the broker-dealer. Just because of that mental part of the 7.
And again, I can relate. I took the 7. I eventually moved on and changed my career. I entered the MQP. I did it for, I think it was like three years. And then I realized, I’m not going to need the 7 again. I got sick of the continuing education. So I stopped before the five years, even though I could have gone five years with it.
I encourage you to not let the mental hurdle be an issue. You are going to give it up one day when you retire. If you’re going to give it up eventually, if you don’t need it anymore and your practice is going a different direction (towards fee-only), don’t handcuff yourself just because you don’t want to “lose” an exam you took 25 years ago, that you’re not even effectively using anymore, or maybe don’t need to use anymore going forward.
The world has changed, the industry has changed. It’s evolved to the point you likely don’t need it in many instances.
With that, like I said at the top, my name is Brad Wales with Transition To RIA. This is the sort of thing I help advisors with is understand what does your practice look like now, what would a transition into the RIA model look like? In this case, is there a commission component we need to consider? Would you be maintaining that? Near-term, long-term, would you be striving to be 100% fee-only?
Helping you understand how that works, how the options work, what other advisors are doing. That’s the sort of thing I talk to advisors all day long about. I’m happy to have that conversation with you as well.
First things first though, head to TransitionToRIA.com where you’ll find all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers. All kinds of things to help you better understand the RIA model.
At the top of every page is a Contact link. Click on that and you can instantly and easily schedule time to have a one-on-one conversation with me. Whether you want to talk about today’s topic or anything else RIA related.
Again, TransitionToRIA.com.
With that, I hope you found value on today’s episode, and I’ll see you on the next one.
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